Strong Growth In The Medical Device Manufacturing Sector

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Intuitive Surgical's (NASDAQ: ISRG) robotic surgical system is designed for surgery that is minimally invasive and is therefore beneficial for certain procedures. Smaller incisions mean less pain, less time to recover, and less time spent in hospitalization.

Over the course of time, it is likely that robotic surgery will expand to more advanced surgeries. As this happens, Intuitive Surgical will likely benefit on the basis of its performance to date.

Intuitive is rolling out its third generation of da Vinci surgical systems (first standard da Vinci system, second da Vinci S system, third da Vinci Si system).  Revenues are generated from the da Vinci system along with the peripherals and servicing contracts required to maintain the systems.  As Intuitive introduces upgrades on the da Vinci systems, some customers exchange older units for new ones, and older units can be refurbished and resold at a discount. Trade-in sales can be an important number for growing businesses and indicate the extent to which existing customers continue to use the system, new customers, who may not wish to acquire the latest system, and existing customers who like the product and want to buy extra second hand units at a lower price.

What Has Been Happening?

Intuitive Surgical reported revenue of $609 million for the fourth quarter of 2012, up approximately 23% compared to $497 million in the same quarter of the previous year.  Revenue growth was driven by the continued adoption of da Vinci surgery procedures and higher da Vinci Surgical System sales. Fourth quarter revenues from instruments and accessories revenue grew by 29% to $254 million from $196 million year on year. The growth in instruments and accessories revenue was because of growth in da Vinci surgical procedures and the introduction of new products. da Vinci surgical procedures grew by roughly 25% in the fourth quarter compared to the same quarter of the previous year, driven primarily by the growth in  gynecology and general surgery in the United States which was partially offset by a decline in prostatectomy procedures.

Financials 

Fourth quarter systems revenue was $265 million, an increase of 18%, compared with $225 million during the same quarter of the previous year. The growth in systems revenue was primarily because of the sales of 175 da Vinci Surgical Systems, compared to sales of 152 systems during the same period of the previous year. Fourth quarter service revenue increased by 20% to $91 million from $75 million year-on-year as a result of growth in the installed base of da Vinci Surgical Systems.

Fourth quarter operating income increased to $248 million from $200 million in the fourth quarter of 2011 and results for the fourth quarter of 2012 included $38 million of non-cash stock-based compensation expense compared with $35 million for the fourth quarter of 2011.Fourth quarter net income was $175 million, or $4.25 per diluted share, compared with $151 million, or $3.75 per diluted share year on year.

Revenue for 2012 totaled $2.179 billion and increase of 24% from $1.757 billion for 2011. Net income for 2012 was $657 million, or $15.98 per diluted share, compared to net income of $495 million, or $12.32 per diluted share in 2011.

The company ended the fourth quarter with $2.9 billion in cash, cash equivalents and investments, reflecting an increase of $219 million during the quarter. $53 million in cash was used to repurchase 102,000 shares of Intuitive Surgical’s common stock in the fourth quarter.

Other Medical Device Manufacturers

Medtronic (NYSE: MDT) is a well-known producer of medical equipment for the diagnosis, management, and treatment of heart rhythm disorders. Pacemakers are one of their most popular products and the stock is up over 50% since its lows in 2011. Medtronic recently began a clinical trial to test neurostimulation therapy of its Specify 5-6-5 spinal cord stimulation treatment. This trial will evaluate the company's therapy for patients with failed back surgery syndrome (FBSS) and lower back pain. Specifically, the study will include 300 patients from all parts of the world. According to Medtronic, around 10% of the entire U.S. population lives with back pain. The company also states that 20% of European adults suffer from chronic pain. Medtronic claims that its neurostimulation therapy has treated more than 250,000 people so far.

MAKO Surgical (NASDAQ: MAKO) produces robotic surgical equipment designed to treat osteoarthritic disease and the stock is down almost 75% from its 2012 highs, which could represent at buying opportunity for long-term investors. MAKO is very similar to Intuitive Surgical because they both manufacture medical robotic equipment, though with different applications. Sales have been a big problem for MAKO Surgical over the past year which has made it a rough ride for shareholders. The lagging U.S. economy and the European financial crisis are taking a toll on sales. MAKO Surgical is down 68% over the past 52 weeks and over 14% since the start of this year.

Summary

Intuitive is a genuine growth stock and I expect it to show a strong stock performance in the coming months. The factors to be considered are the strong growth in the United States as well as Japan, though Europe could see much slower growth until its economic problems are resolved.  However, I consider the stock to be relatively expensive based on valuation and would recommend that it be bought only if there is a pullback in price.


jordobivona has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical and MAKO Surgical . The Motley Fool owns shares of Intuitive Surgical and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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